As I’ve mentioned a few times before, with the market lulling everyone to sleep, there’s no time like the present to put on some long volatility plays. Buoyed by the early success of my AAPL strangle (up 5% in 2 days) and the decent start of the PM straddle (up about a percent today), I’m ready to proceed with several others.
The goal is to have at least a quarter, if not half of my portfolio in such longer term plays. By keeping my usual directional call/put trades low risk (1%), I usually have a large percentage of the account just standing still. This does collect some nominal interest, but not enough to counter inflation. So, really, I’m just losing “value.”
The candidates for straddles/strangles fall under 2 categories. The first, like AAPL, are stocks that have been on a tear and thus have become quite “overbought.” Shorting them outright would be madness (since who knows how long the run can go on), but straigth up buying may not be the best idea either. So in comes a straddle, which can “bank coin” in either direction (especially if the IV% & ATR are low). The only way it wouldn’t be profitable is if the stock enters a longer period of consolidation.
An obvious choice here is The Fly-special GMCR, up 30% this month.
Play: Jun’10 90./85. strangle (5% risk) – 20% in 6 months; b/e @ Jun. expiration: $66 & $109
Another one is X, up over 50% in 2 months.
Play: Jul’10 55. straddle (5% risk) – 25% in 200 days; b/e @ Jul. expiration: $40 & $70
The second category encompasses stocks that, like PM, are in consolidation right now. Strangles/straddles in this case are betting on a sharp/big move in both stock price and/or volatility. A couple plays here as well, with the first obvious choice being the market itself via SPY.
Play: Sep’10 115./110. strangle (10% risk) – 10% in 9 months; b/e @ Sep. expiration: $99 & $126
The second one is the usually quite volatile FSLR, stuck in a flat line for most of December.
Play: Jun’10 135./120. strangle (3% risk) – 25% in 6 months; b/e @ Jun. expiration: $90 & $165
So all that combined with AAPL (10% risk) and PM (2%) makes me 35% invested in long(er) term straddles/strangles. I think that’ll do, for now…
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good stuff. really good stuff.
just on the “long volatility” within the first sentence, my initial response was “you’re a fucking idiot, give me a time frame.” then, upon skimming while keeping in mind “long volatility,” i see this crap about the fly special gmcr, i thought “oh my fucking dog, this is SO going the wrong way.”
but this is the king. I need to look at this closer. and unlike that cain character yapping about mgm yesterday or last month or when ever it was, i realized i needed to think about this a little closer.
king indeed! rock on!
“long” as in the direction of the trade on volatility (“vega”), not necessarily in the length of the trade. Sorry if that was unclear. Notice how all the implieds are at or near 6-month lows (which, perhaps not coincidentally, is the max. timeframe that we’re looking at for these trades).
That being said, I can’t quite make up my mind whether to thank you or to tell you to fuck off…and I don’t really feel like thinking a “little closer” about what you actually meant.
In either case, I guess, thanks for the comment. And I’m not even “King” anymore!
sorry – the vicar had too much tea last night. i should have been more clear.
this site is rife with chartists. good chartists, but chartists all the same. your work here is a step beyond that and leads to a thoughtful view of not just the stocks in question but the surrounding market. much better than the usual trifle thrown against the wall on the public portion of this site.
my apologies for the profanity. i should really make a new year’s resolution to not drink and blog.
you have my vote for king again.